Did you know about half of all small businesses fail due to bookkeeping and accounting errors? A majority of those failures are directly related to poor accounting practices.
Many growing restaurants struggle to create a well-tuned accounting process, especially as certain systems and processes change to support increased activity. While invoicing, accounts payable and payroll often suffer first, improper or delayed accounting also stifles future growth by limiting the necessary data for strategic decisions.
To help restaurant owners better understand the basics of restaurant accounting, we have provided the guide below:
DEFINING RESTAURANT COSTS
For restaurant accounting, all costs can be broken down into four categories:
- Cost of goods sold for restaurants are conceptually different from other industries in that the items in this category are mostly food, beverages and ingredients. A good way to think of this is by breaking down each meal or item on the menu and determining what goes into making the specific product. Labor costs, unlike manufacturing companies, should not be included in cost of goods sold.
- Labor costs are the wages paid to waitstaff, hosts, kitchen staff or anyone on the payroll. This includes payroll taxes and employee benefits. It is important not to allocate these expenses to costs of goods sold in order to understand what costs go directly into a product.
- Occupancy expenses include rent, property taxes and insurance, mortgage and utilities. These are commonly described as fixed costs. Once these expenses have been set by way of contract or agreement, they do not change greatly from year to year. It is important to find value in these expenses when entering into agreement, but they are generally not considered when looking into improving profitability.
- Lastly, there are operating expenses. These costs are all the other expenses that do not fit into the above three categories. For example, marketing, professional fees, dining materials and other administrative costs, fall into this group. On the grand scale of restaurant accounting, these expenses will help to support the well-being of the business, but are less of a focus compared to cost of goods sold and labor expenses.
USE OF ACCOUNTING RATIOS
As accountants, we use ratios to help us understand the well-being of a business. The following are a few ratios we use, directly related to the restaurant industry:
- Prime costs to sales ratio takes into consideration the costs related to the sale of the product. Prime costs are calculated by taking costs of goods sold and adding labor costs. By taking a restaurant’s prime costs divided by total sales, the results is the percent of direct costs that make up total sales. Successful restaurants and bars will typically operate at 65% or lower. By decreasing ingredient costs or optimizing employees, a restaurant may see this percentage decrease.
- Cost to sales ratio is similar to the above, but focuses directly on cost of goods sold. The ratio is calculated by taking cost of goods sold (food and drink costs) divided by total sales (food and drink sales). Profitable restaurants and bars fall into the 25% – 35% for this ratio. For businesses whose expenses are heavily reliant on food and drink costs, this is a ratio the management team should continually analyze to increase profitability.
- Lastly, here are a couple factors that can be easily calculated based on the size and output of a specific restaurant:
- Take the total sales from a certain period and divide by how many seats are in the restaurant or bar. This number can be annualized or figured by day to determine how much each seat brings in for revenue. Would additional seating bring in more revenue? At what point is the restaurant space fully optimized?
- Another aspect is the duration of time each customer spends in the establishment. If server or preparation efficiency increases, does the amount of time spent in the restaurant decrease? Is the restaurant able to serve additional customers due to this time decrease?
GENERAL PRACTICES & KEYS TO OPERATION
- Accounting software is where most businesses start when opening a restaurant or bar. The most popular software programs on today’s market are QuickBooks, Sage 50, Microsoft Dynamics GP and Wagepoint, but there are many others available. Consult an accountant or bookkeeper to determine the best fit for the business and operations.
- Another critical software system for a restaurant is the point of sale (POS) system. A POS system tracks and records orders and completes payment transactions. Common systems used in the restaurant industry include QuickBooks, Square, Aloha and Shopkeep. Similar to accounting software, there are other systems available that are compatible with various programs. The best way to decide is by researching the features each POS system offers. If there are reports or additional features that are not useful, look into buying a more cost effective software. A major benefit of the systems listed above, is there are very basic versions offering add-ons for minimal costs.
- An important part of managing a successful restaurant is understanding cash flow. Managing quantity and timing of product orders, paying employees and even keeping track of tips received all fall under the category of cash flow management. Focus on how funds are used to create value and how expenses fall into each cost category. This will help to maintain a healthy cash balance.
- Separate activities in the business. For example, track beer sales and liquor sales separately, as well as beer cost and liquor cost. If the ratios explained earlier in this article are applied to each activity, it can be determined if each activity is meeting expectations and what actions can be taken if an activity is not.
- As a restaurant owner, it is important to study the industry. Pick different restaurants and bars that have had success. Figure out practices those company’s use and apply them to help improve operations. Try to find services or products the business excels at compared to the industry. With the hospitality industry being highly competitive, it is key to figuring out what separates the business from the rest.
- How much money is thrown away every day from food trimmings? Reducing waste makes good business sense. Track and analyze the waste in the restaurant. Conduct inventory reviews in order to compare purchase and quantity of garbage. Change menu in order to minimize quantity of leftovers. Reducing food costs can generate greater revenue.
For a majority of restaurant or bar owners, starting an establishment stems from a talent in cooking or a passion for satisfying customers. Though this may create success to an extent, it is crucial to the well-being of the business to practice proper bookkeeping and accounting methods. If this aspect is outside of an owner or management’s skillset, it is important to work with a professional bookkeeper or accounting provider.
Smith Schafer is a recognized leader in providing accounting and consulting services to the hospitality industrysince 1971. We have a team of experts, focused on working with the hospitality industry, and committed to helping our clients succeed. If you have questions about improving your business model, implementing an accounting practice or tax planning strategies to improve restaurant operations, Smith Schafer can help. For additional information, click here to contact us. We look forward to speaking with you soon.
Real Life Example: You received your financial statements from your accountant and you are making money. That is great! Isn’t it? But what else are the numbers on the paper telling you? Is your hospitality company performing as well as its industry peers? Should you be doing better?
Utilizing benchmarks is an easy way to determine how well your hospitality company stacks up against others in your industry. Below are benchmarks regarding three major subgroups in the hospitality industry – restaurants, hotels & lodging and golf courses:
Sales per square foot. This is a reliable indicator of a restaurant’s profit potential. Divide annual sales by the total interior square footage. Include storage, restrooms, the kitchen, etc. A full-service restaurant should have sales per square foot of $150 – $250 to break even or have a small profit. While a limited-service (counter-service) restaurant should be in the $200 – $300 range for the same result.
Rent. The goal is to limit rent expense to 6% of sales or less. This number does not include other occupancy costs like insurance, real estate taxes, or common area maintenance fees. When those additional expenses are added, the total occupancy cost should be 10% or less. An occupancy cost above 10% is considered excessive and can seriously eat away at your profits.
Prime Cost. Generally considered the most important metric because the underlying costs are the most volatile. Keeping your prime cost in-check is a major step toward profitability. To calculate prime cost, add cost of sales to payroll costs and divide by total sales. Full-service restaurants should have a prime cost of about 65% or less, while limited service restaurants should be closer to 60% or less.
Additional Cost of Sales Metrics
- Food – approximately 30% of total food sales
- Liquor – 18% to 20% of liquor sales
- Bottled beer – 24% to 28% of bottled beer sales
- Draft beer – 15% to 18% of draft beer sales
- Wine – 35% to 45% of wine sales
- Soft drinks – 10% to 15% of soft drink sales
- Management Salaries (of total sales) – 10% or less
- Payroll Cost (of total sales)
- Full – 30% to 35%
- Limited – 25% to 30%
- Hourly Employees Gross Payroll (of total sales)
- Full – 18% to 20%
- Limited – 15% to 18%
Hotels & Lodging
The standards listed below are only intended to include the room rental portion of the hotel & lodging industry. If your hotel or lodging business also has a food and beverage component, refer to the section above.
Occupancy. Number of rooms sold divided by number of rooms available. The occupancy rate is the highest it has been in nearly 30 years and this means good news for average daily rate and revenue per available room growth, according to a report from Marcus & Millichap. The national average occupancy rate for 2018 is 66.1%. In 2018, Minnesota’s average occupancy rate was 56.3% according to STR, Inc.
Average Daily Rate (ADR). Net room revenue divided by total number of rooms sold. The national average ADR is $128.94 as of February 2019. This is the national average among all market segments – luxury, upscale, mid-price, economy and budget. The Minnesota ADR average is slightly lower than the national average at $106.97.
Revenue per Available Room (RevPAR). Net Room Revenue divided by number of rooms available. The national average RevPAR reached $85.96 in 2018. The Minneapolis market is in line with the national average at $82.80. However, the Minnesota RevPAR average is $60.21.
How much should you be spending on course maintenance and other expenses? According to Club Benchmarking, golf courses all across the country consistently spend about the same percentage of their gross profit (the amount of money a course has available for funding fixed operating expenses) on these six areas:
- Course Maintenance
- General & Admin Expenses
- Fixed Charges (Overhead)
- Buildings & Maintenance
- Sports & Recreation.
Approximately 30% of a course’s gross profit is dedicated to maintenance, however if the course is a golf-only club, this number increases to 44%. For full-service country clubs, offering additional sports and recreation facilities, approximately 12% of gross profit is spent on upgrading and maintaining those additional sporting areas. A full-service club spends approximately 4% more on buildings and building maintenance than golf-only clubs, about 19% versus 15%. General and Administrative costs should be between 16% and 21%, and Labor should be between 10% and 15%. Overhead such as insurance, real estate taxes, and interest expense should be about 9%.
Every hospitality company is unique and the above standards will not apply to all businesses. The metrics should be used as a guideline. Our Hospitality Group helps businesses thrive in an industry known for high turnover, intense competition, tight controls and high costs. Our Hospitality Group is committed to serving over 100 Minnesota hospitality entities. We take great pride in consulting on various industry specific issues as well as the broader needs of these businesses and their owners.
Able Seedhouse and Brewery is located in Logan Park, Northeast Minneapolis. They brew a wide range of ales, with a highlight on the grains. They literally, and figuratively, started by planting one seed. That one seed turned into many. They are actively working to grow the seedhouse within their brewery, which includes working with local farmers to grow small grains and malting.
Between 2011 and 2016, the number of licensed breweries in Minnesota more than quadrupled, according to the Department of Public Safety. Minnesota brewery owners face the same challenges many other small businesses face, including cash flow, inventory management, distribution and complicated tax regulations. Whether you are building a new brewery or expanding an existing one, the interview with Able Seedhouse and Brewery below will provide technical and business ideas to help get the job done.
Q: WHAT INSPIRED YOU TO JOIN THE BREWERY INDUSTRY?
A: A connection to the malting component and agriculture. Beer is a great way to highlight the value of locally sourced grains.
Q: WHAT WERE THE BIGGEST CHALLENGES WHEN OPENING ABLE SEEDHOUSE AND BREWERY?
A: It is hard to focus on the biggest challenge because it felt like all the little challenges compounded to make the process difficult. Timing was a big issue for us. Attempting to juggle the delivery of equipment, permitting and other details required to open our doors was a challenge.
Q: WHAT ARE YOUR TOP TAX AND ACCOUNTING CONCERNS OR QUESTIONS?
A: We are very focused on cash management at the moment to ensure we are investing in the best ways to generate the highest return on investment (ROI). Any recommendations to manage cash?
Smith Schafer’s Insight: Many software products allow for tracking product costs as a percentage of revenue. Determine the industry benchmark for product costs and capital investments and try to align your brewery’s spending accordingly. By tracking your costs and reinvestments, you will be able to quickly determine if you are out of line with industry standards or when you will need to increase the price of your product to consumers based on your costs.
Another concern is determining when and why we need to add resources to our accounting department to keep up with growth.
Smith Schafer’s Insight: The easiest way to determine this is to ask your current accounting department if they need help. If your department consistently gets payroll done, but is unable to finalized monthly accounting in a reasonable time period, (i.e. before the end of the next month), then it is likely your current staff could use additional support. However, this does not mean you need to hire someone full-time. Consider part-time help, or an outsourced accounting department. Smith Schafer has a designated Small Business Services team to assist many clients with their everyday accounting needs.
Another sign you may need additional accounting help is if you are unaware of tax credits your brewery may be eligible for. Are you able to keep up with the ever-changing tax environment? If you answered no, you may need to consider adding accounting resources. You should not be tied down by spreadsheets, compliance reporting and tax research. You need a team member who minimizes your taxes through forward-thinking strategies and services.
For example:Below are a few tax credits your accounting resource would help your brewery identify and take advantage of.
- The Research and Development Tax Credit
- Work Opportunity Tax Credit
- Tip Credit
Q: WHAT IS ABLE SEEDHOUSE AND BREWERY’S GREATEST OPPORTUNITY FOR GROWTH?
A: Geographic expansion.
Smith Schafer’s Insight: While geographic expansion is certainly an opportunity for growth, it brings with it additional risks and costs. Overhead costs, market saturation and other factors represent reasons why other avenues for growth may be a better option.
- Cooperation with another brewery across town is a good way to expand consumer base while sharing costs. This sort of joint venture may seem counterintuitive; inviting your competitor into your market may reduce your local market share, but doing so allows your brand seen by a wider range of consumers who might decide they want to try more or your products.
- Another avenue for growth may be partnering with other local businesses, like restaurants or your local Chamber of Commerce. Creating goodwill in your community goes a long way in customer retention.
- Many breweries partner with food trucks to serve their hungry customers. Others work with event planners to be included as a beer vendor for community and private events.
Q: WHAT INDUSTRY MEDIA DO YOU UTILIZE TO KEEP CURRENT ON RELATED BUSINESS TOPICS, SUCH AS PAYROLL REGULATIONS, OVERTIME OR VACATION REGULATIONS?
A: We use a third party product, SaaS, for payroll and to help us manage HR issues.
Smith Schafer Insight: Consider subscribing to the Minnesota Department of Revenue email updates, MNCPA newsletter or the Smith Schafer hospitality industry blog. These resources highlight timely information pertaining to the hospitality industry. Joining an industry association, such as the Minnesota Hospitality Association, will also provide an avenue to what is going on with other businesses like yours.
Q: WHAT ADVICE WOULD YOU GIVE TO SOMEONE CONSIDERING OPENING THEIR OWN BREWERY?
A: Know who you want to be and get access to existing breweries’ financials to determine if your plan makes sense. For example, the size of brewery, where and how you will sell your beer, funding, location, profitability and cash flow, and team experience to execute.
Smith Schafer’s Insight: We recommend meeting with two people at the start of any venture, a lawyer and an accountant. Do not wait until tax time to share with your accountant about starting a new business. Cost is often a concern with new business owners, but skipping a consultation with your tax accountant may end up costing you more in the long run.
Breweries face a number of business issues, requiring a broad skill set to find solutions. Smith Schafer’s depth in the hospitality industry means you will always receive the advice you need. Smith Schafer has been recognized leader in providing accounting, auditing and consulting services to the hospitality industry since 1971. Our Hospitality Group is committed to serving over 100 Minnesota hospitality entities. For more information on accounting and tax strategies that may benefit your brewery, contact a Smith Schafer professional today! We look forward to speaking with you soon.
Are you aware of tax deductions and credits your hospitality business may be eligible for? Many hospitality owners tend to focus on the day-to-day operations and dealing with compliance regulations. Tax related matters tend to be postponed until after the end of the year. Now is the time to plan ahead for tax deductions to maximize the tax savings in the future. Smith Schafer has provided a list of possible deductions and credits to help our hospitality clients, prospects and others be aware of possible tax savings in the hospitality industry.
1. TIP CREDIT
Hospitality businesses may be able to claim a credit for social security and Medicare taxes paid or incurred by an employer on certain employees’ tips. This credit is part of the general business credit.
You may claim this credit if you meet both of the following conditions:
- You had employees who received tips from customers for providing, delivering, or serving food or beverages for consumption if tipping of employees for delivering or serving food or beverages is customary.
- During the tax year, you paid or incurred employer social security and Medicare taxes on those tips.
Generally, the credit equals the amount of employer social security and Medicare taxes (7.65%) paid or incurred by the employer on tips received by the employee.
2. WORK OPPORTUNITY TAX CREDIT (WOTC)
The Work Opportunity Tax Credit is a Federal tax credit available to employers for hiring individuals from certain target groups who have historically faced barriers to employment and discrimination in the workplace. You may be able to claim this credit on first- and/or second-year wages you paid to or incurred for these employees during the tax year.
You must ask for and be issued a certification for each employee from the state workforce agency (SWA) of the state in which your hospitality business is located. The certification proves the employee is a member of a targeted group. You must either:
- Receive the certification by the day the individual begins work; or
- Complete IRS Form 8850, Pre-Screening Notice and Certification Request for the WOTC, on or before the day you offer the individual a job and receive the certification before you claim the credit.
The new hire must fall into one of the following target groups listed below:
- Qualified IV-A Recipient
- Qualified Veteran
- Designated Community Resident
- Vocational Rehabilitation Referral
- Summer Youth Employee
- Supplemental Nutrition Assistance Program Recipient
- Supplemental Security Income Recipient
- Long-Term Family Assistance Recipient
- Qualified Long-Term Unemployment Recipient
3. THE RESEARCH & DEVELOPMENT (R&D) TAX CREDIT
The R&D Tax Credit is an incentive for hospitality businesses to invest in research and development activities to increase growth and competitiveness. Businesses may be able to take credit up to 13% of eligible spending for new and improved products and processes.
Qualified research must meet the following four criteria:
- New or improved products, processes, or software
- Technological in nature
- Elimination of uncertainty
- Process of experimentation
Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent.
4. 199A TAX DEDUCTION
The Tax Cuts and Jobs Act (TCJA) created a new deduction for pass-through business owners. This deduction, in certain situations, may provide up to 20% tax deduction on qualified business income for eligible partnerships, S corporations and sole proprietorships. For taxpayers with taxable income exceeding $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers, the deduction is subject to limitations.
These limitations include:
- Whether the business is classified as a service trade or business.
- Taxpayer’s taxable income.
- The amount of W-2 Wages of the business.
- Unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business.
5. SECTION 179 EXPENSING
Beginning in 2018, hospitality businesses may deduct up to $1 million of cost of qualifying property placed in service during the given tax year. In addition, a hospitality business owner may purchase up to $2.5 million in business property qualifying for the Section 179 deduction each year before the benefit is phased out. Limits will be indexed for inflation starting in 2019.
TCJA expanded eligible costs to encourage property improvements. The definitionof eligible property includes certain depreciable tangible personal property usedpredominantly to furnish lodging. It also includes “qualifying expenses” such as roofs, HVAC, fire alarm, and security systems for non-residential property. Costs incurred as part of new construction cannot be expensed under the Section 179 deduction. The increase in amount of Section 179 allowed encourages business to increase their capital expenditures budget.
6. IMMEDIATE 100% EXPENSING (BONUS DEPRECIATION)
TCJA now allows hospitality businesses to fully expense certain capital expenditures instead of depreciating them over a several year period. These expenditures, including acquisitions of used property, may be fully expensed starting with business assets placed in service after September 27, 2017. Bonus depreciation will begin phasing out for assets placed into service after December 31, 2022. This immediate tax benefit is likely to encourage more capital spending.
The hospitality industry has been impacted in several ways by the tax reform bill and the change in the industry. If you have questions about these changes or tax planning strategies that may benefit your hospitality business, contact a Smith Schafer professional today! We look forward to speaking with you.
Restaurant payroll is ruled by complex laws for employee wages and tips. With high turnover, unique tax situations and generally, large amounts of checks to be processed, managing a restaurant’s payroll and legal compliance can be a challenge. There are many ways minimum wage regulations, the tip credit, reporting and processing can affect payroll. Below are a few tips and rules to help payroll be a little easier:
As of January 1, 2019, the Minnesota minimum wage rate will increase to $9.86 per hour for large employers and $8.04 for others. The new rates will be:
- Large Employers ($500,000 or more in annual gross revenues) – $9.86 per hour
- Small Employers (less than $500,000 in annual gross revenues) – $8.04 per hour
- Wisconsin can still pay Federal minimum wage for tipped employees, which is $2.13, as long as their tips per hour and the $2.13 brings their wage to $7.25 per hour.
- Minneapolis: These rates do not apply to work performed in the City of Minneapolis, which has higher minimum wage rates. Minneapolis is currently at $11.25 per hour for large businesses (more than 100 employees) and $10.25 for small businesses. The next increase for Minneapolis will be July 1, 2019, when rates increase to $12.25 for large employers and $11.00 for small businesses.
- St. Paul: The City of St. Paul recently approved a city minimum wage that incrementally increases the wage to $15 per hour by July of 2023 for large employers and by 2027 for small. The first bump for both large and small businesses occurs on July 1, 2020, so the state minimum wage will apply until then.
As a restaurant owner, you must follow whichever law, federal, state, or even local, is the most generous to employees. The Minnesota minimum wage is higher than the federal minimum wage, so employees who are covered by both laws, must be paid the higher Minnesota minimum wage.
Minnesota employers are prohibited from taking a tip credit against the minimum wage. Minimum wage rates apply to all hours worked and employers may not count tips received by an employee toward the payment of minimum wage.
You may be able to claim a credit for social security and Medicare taxes paid or incurred by an employer on certain employees’ tips. You may claim this credit if you meet BOTH of the following conditions:
- You had employees who received tips from customers for providing, delivering, or serving food or beverages for consumption if tipping of employees for delivering or serving food or beverages is customary.
- During the tax year, you paid or incurred employer social security and Medicare taxes on those tips.
Generally, the tip credit equals the amount of employer social security and Medicare taxes (7.65%) paid or incurred by the employer on tips received by the employee.
Restaurant employees are required to report all income, even cash tips received by employees, to the IRS. Employees will often miscalculate their tips to try to evade being taxed. This makes it more difficult to manage restaurant payroll accurately. The Internal Revenue Service has a form to help your restaurant track tips for the most efficient reporting.
Payroll Deadlines & Processing
Data entries should be checked twice to ensure hour and wage entries are correct before processing. If hourly wages or employee hours are entered incorrectly, it could cost your restaurant a large sum of money. Also, as a restaurant owner, you must be aware of deadlines for depositing payroll taxes to federal, state, and local agencies to avoid late penalties and interest charges.
Affordable Care Act Reporting
Under the current law, the Affordable Care Act (ACA) requires employers with 50 or more full-time employees to offer minimal essential health care coverage to their employees and report this information to the IRS. The purpose of the reporting is to identify employer’s full-time employees, whether they were offered coverage, and the cost of that coverage.
This reporting is used by the IRS to determine any applicable penalties and verify an employee’s subsidy eligibility. For the 2018 plan year, if you have 50 or more ACA full-time employees, you could be subject to an excise tax for failure to offer a health care plan that is minimum essential coverage to at least 95 percent of your full-time employees. The excise tax would be assessed if one employee obtains subsidized coverage through a public health insurance exchange.
Many restaurant owners seek professional assistance navigating the complexity of restaurant payroll. Restaurant Accounting has been a key practice area of ours since 1971. Our Hospitality Accounting Group has a full-service payroll department to assist our clients with payroll processing. We provide a complete, customized solution for your payroll needs. Click here for more information.
As a general rule, local sales tax should be charged to customers on all sales made in a local taxing area. The local tax applies to anyone who is from outside the city or county and picks up items in the local area for business or personal use. This applies even if the customer takes the items outside of the local tax area.
Do not charge local sales tax on sales of taxable items when:
- You receive a completed Form ST3 – Certificate of Exemption.
- You ship or deliver the items to your customer outside the local area.
Note: You must collect local sales tax based on where your customer receives the taxable product or service. The tax should be calculated and charged to the customer based on the final destination of the delivered items.
If a restaurant (outside the locality) buys and picks up materials in a city with a local tax, the local tax rule applies to this sale. To figure the tax, combine the state tax rate and the local rates. Apply the combined rate to the taxable sales price and round to the nearest full cent. Report local taxes when filing your Minnesota Sales and Use Tax. Note – the figures are reported separately from state taxes.
SALES TAX CALCULATOR
The Minnesota Department of Revenue website has a sales tax calculator to determine the state and local sales and use tax rate to apply to taxable purchases. To find the appropriate sales tax rate for a particular jurisdiction, enter a valid address and city, or enter the full nine digit zip code. The nine digit zip code method is the most accurate. The sales tax calculator DOES NOT include any special local taxes, such as lodging taxes or liquor.
For additional information, visit the Minnesota Department of Revenue website. Click for a table listing all of the local taxes. The Department has free classes and webinars on sales tax, which are held throughout the state. Click for the full class schedule including locations, dates, and times.
If you have questions about sales tax or would like assistance with tax planning, Smith Schafer can help! Click here to schedule a free 30 minute consultation.